Pre-Packs

Pre-Packs

Subject: Economy

Context: The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, passed by Lok Sabha on Wednesday has proposed ‘pre-packs’ as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs)

Concept:

What are ‘pre-packs’?

• A pre-pack is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
• A pre-pack envisages the resolution of the debt of a distressed company through a direct agreement between secured creditors and the existing owners or outside investors, instead of a public bidding process.
• The pre-pack mechanism is effective in arriving at a quick resolution for distressed companies, and that the regime should be rolled out to all corporations over time as legal issues are settled through case law.
• This system is a mechanism for insolvency resolution in the United Kingdom and Europe over the past decade. Under the pre-pack system, financial creditors will agree to terms with the promoters or a potential investor, and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
• The approval of at least 66 per cent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT. The NCLTs will be required to either accept or reject an application for a pre-pack insolvency proceeding before considering a petition for a CIRP.

Need for Pre-Packs:

• Slow progress in the resolution of distressed companies has been one of the key issues raised by creditors regarding the Corporate Insolvency Resolution Process (CIRP) under the IBC.
• CIRP is the process of resolving the corporate insolvency of a corporate debtor in accordance with the provisions of the Code.
• Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.

Key Features of Pre-Packs:

• Pre-Pack usually requires services of an insolvency practitioner to assist the stakeholders in the conduct of the process.
• The extent of authority of the practitioner varies across jurisdictions.
• Pre-pack envisages a consensual process – prior understanding among or approval by stakeholders about the course of action to address stress of a Corporate Debtor (CD), before invoking the formal part of the process.
• No requirement of Court Approval: It does not always require approval of a court. Wherever it requires approval, the courts often get guided by commercial wisdom of the parties.
• Outcome of the pre-pack process, where approved by the court, is binding on all stakeholders.

How are pre-packs Insolvency Resolution Process (PIRP) better than Corporate Insolvency Resolution Process (CIRP)?

• One of the key criticisms of the CIRP has been the time it takes for resolution. At the end of March 2021, 79 per cent of the ongoing insolvency resolution proceedings had crossed the 270-day threshold. A major reason for the delays is the prolonged litigation by erstwhile promoters and potential bidders.
• The pre-pack in contrast, is limited to a maximum of 120 days with only 90 days available to stakeholders to bring a resolution plan for approval before the NCLT.
• Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs;
• In the case of CIRP, a resolution professional takes control of the debtor as a representative of financial creditors. Experts note that this ensures minimal disruption of operations relative to a CIRP.